Banks in the country are tightening risk controls while shifting lending toward businesses, as declining returns on government instruments force a rebalancing of credit into the real sector.

Managing Director of GCB Bank, Farihan Alhassan, says the industry is becoming more deliberate in its lending, with stronger internal checks to avoid a repeat of past loan-quality problems.

“We have raised our underwriting standards as a bank,” he said on PM Express Business Edition.

“We have early warning meetings that we are able to identify which loans we think will be problematic in the long term. If we have to restructure, we do that.”

He stressed that banks are now more selective.

“We play in areas that we understand, and if we don’t understand your sector, there’s absolutely no way we’re going to play in that sector.”

According to him, lending decisions are subject to stricter scrutiny. “We have standards that would go through as a credit committee to be sure that this loan ticks that box.”

Alhassan argues that current non-performing loan levels reflect deeper economic challenges.

“The current NPL ratios within the industry are a function of how badly the economy was run a few years ago.”

Even as macro conditions improve, he warns that a low-interest-rate environment comes with risks.

“A low-interest regime also comes with its own problems, coupled with the directives of the Central Bank, which is invariably forcing banks to lend to the real sector. So if you’re not careful, you’re going to have subprime loans, so there needs to be that balance.”

He notes that regulatory pressure is also shaping behaviour.

“The central bank has actually cautioned that banks whose NPLs go above a certain threshold, the replication is for them.”

This, he says, will force discipline across the industry.

“All those things will help banks stay within a certain appetite in terms of how much loans they can give out to the real sector, and they will pay attention to the quality of loans that they are giving out.”

Banks are also being pushed by market realities.

“Banks will now not put their assets or their deposits in government instruments, because the earnings there are very low.”

The shift, however, presents an opportunity for businesses.

“Good businesses would have a good field day to operate. They would have access to credits that they probably won’t have had in the past, and would have the ability to actually pay back these loans, because the interest rates are quite low.”